Wednesday 16 October 2013

HDB clamps down on rental transfers of commercial units from 16 Oct 2013

By Daryl Chin, The Straits Times, 15 Oct 2013

THE Housing Board has moved to curb speculation in its commercial and industrial properties in a bid to prevent the cost from being passed on to customers.

This will be done by restricting business owners from transferring such rental premises to others, effectively phasing out the cash incentive some would receive for doing so.

Under current practices, an incoming tenant forks out a cash premium to an outgoing tenant, otherwise known as an assignment fee, when he takes over the tenancy of a property.

With immediate effect, existing tenants are now allowed to transfer their premises only once within the next three years. Tenants who take over will subsequently need to return the space to HDB when they exit the business, and it is up to the board to put it up for tender again.

Business owners "assign" their properties to others because they are either not doing well and need to recoup losses, or a place has become popular and a profit could be made from a transfer, say analysts.

About 500 transfers are processed a year from a pool of 8,000 commercial tenants and more than 10,000 industrial tenants, and the number has crept up over the years, according to HDB.

The average assignment fee for commercial rental space has gone up from $87,000 last year to $144,000 now. Some industrial premises, such as food factories and motor workshops, have been transacted for as much as $150,000.

"High assignment fees and tendered rents contribute to higher operating costs, which may be passed on to residents and consumers. Assignment may also encourage unhealthy speculation," HDB said.

Reactions to the news were mixed. Ms Priscilla Goh, 25, who intends to open a bakery, said the new rule would help people like her. "Putting out an open tender would mean a more level playing field for those of us who can't afford the fee," she said.

But 35-year-old Mr James Ong, an electronics shop owner in Clementi, said it could spell less interest in his space should he decide to close his business. "This gives me fewer options if my business hits a rough patch," he said.

PropNex chief executive officer Mohamed Ismail believes that while the revised rule could weed out those transferring hot rental premises in popular areas for a quick buck, it could also mean a greater wastage of resources. This is because the property would need to be returned to close to its original condition, and the renovation works already done would be wasted.

"The assignment fee, or cash premium, has its merits because it allows similar businesses to take over from each other, while letting the outgoing tenant recoup some of the costs," he said.

HDB said the new measure was aligned with the market practice of other government agencies and private landlords, but provisions will be made for tenants who wish to scale down their businesses. Shop tenants are still allowed to sublet 50 per cent of their shop space, but only one sub-tenant is allowed.

This is to ensure that there are enough amenities to handle the ramping-up of public housing in these areas. More details will be announced later.

Protecting the customer in rental transfers
Editorial, The Straits Times, 17 Oct 2013

BUSINESS operators seeking affordable premises will be happy with the Housing Board's (HDB) curbs on rental transfers of its commercial and industrial units. Exuberant rental bidding is often fed by the prospect of high assignment fees - as high as $150,000 in some cases - paid by newcomers to outgoing tenants. By phasing out such fees, the board is helping to contain operating costs. This market intervention also keeps in mind the interests of customers who ultimately would have to bear the cost of unhealthy speculation in such property.

Businessmen who cannot afford the cash premiums demanded by assignors will have a better chance of competing for commercial and industrial units because new tenants will have to return their premises to the HDB for re-tender if they wish to leave their trades. Fairness has been extended to existing tenants, who will enjoy a three-year reprieve to help them adjust. During this time, they can assign their shops or industrial premises, but their assignees cannot do the same since they will fall into the category of new tenants.

Certainly, there are those who would lose from the change. They would be businessmen who need to transfer units when they go through a rough patch. Market conditions till now have permitted many of them to make a profit from their units to offset business losses. There might also be incoming tenants who would prefer to take over the existing fittings and equipment of a similar business for a reasonable fee, rather than install everything from scratch. However, what outweighs their loss is the larger cost to the economy when volatility sets in as high assignment fees become an easy way for some to make money from units built by a public agency.

The old policy had its uses: It facilitated the exit of marginal tenants with minimal disruption to the services offered in a certain area. However, speculative behaviour, or treating these units as investment, militates against the purpose of the scheme, which is to offer affordable business spaces. This helps entrepreneurs to keep prices low for the benefit of HDB residents and consumers.

In balancing the interests of the various social constituencies that it serves, the HDB has to keep in mind its public character. This gives it a mandate different from that of private-sector developers. Certainly, businesses would prefer less red tape and more flexibility when taking leases from the board. Indeed, the HDB still allows shop tenants to sublet half of their space to one sub-tenant. But even as it builds more amenities for new public housing areas, it has to ensure that businessmen do not gain at the expense of taxpayers. Regulating the secondary market for the transfer of rentals makes the point forcefully.

Commercial, industrial rents: HDB replies

THE revised HDB policy on Oct 15 aims to weed out unhealthy speculation and high assignment fees for HDB commercial and industrial tenanted properties ("New HDB measure will lead to higher business costs" by Mr Tan Yee and "Rein in rising retail rents" by Mrs Lillian Lee; both on Oct 21).

The assignment fee is a private agreement in which an incoming tenant pays to the existing tenant, the amount of which is negotiated between the two parties and is over and on top of the rent.

Such assignment fees could ultimately be passed on to the public in the form of higher-priced goods and services.

Tenants who do not wish to operate their businesses any more will have to return their premises to HDB for retender under the new rule. This will also allow HDB premises to be more easily available to business operators to bid for.

To help new tenants with their businesses, HDB offers a two-month rent-free period for renovation works as most incoming tenants do not take over the old fittings and fixtures left behind.

Recent reports on high transaction prices for coffee shops come under the category of sold properties. They are freely transacted in the open market on a willing seller-willing buyer basis and are not directly affected by the new Oct 15 rule.

Ng Leong Keng
Director (Policy and Planning)
Housing and Development Board
ST Forum, 4 Nov 2013

New HDB measure will lead to higher business costs

I AGREE the Housing Board’s new measure will curb the trend of rising assignment fees of HDB commercial and industrial rental properties (“HDB clamps down on rental transfers of commercial units”; last Tuesday).

However, it is unlikely to achieve its objective of preventing higher business costs – arising from speculative assignment fees – from being passed on to customers. The assignment fee is a reflection of:
- the savings from the below-market rental rate that the incoming tenant would be able to enjoy through reassignment of rental property, compared with the new market rental rate the incoming tenant would have to pay via a new HDB open tender and;
- the time and renovation cost savings that the incoming tenant would enjoy from the reassignment of such a property.
The new measure, therefore, will result in the incoming tenant having to bear the full market rental cost, the full renovation cost and the “time cost” of the two to four months needed to process everything. These will likely be passed on to the consumers.

Tan Yee

ST Forum, 21 Oct 2013

Rein in rising retail rents

AS AN ordinary consumer of goods and services, I have noticed that small-time retailers and hawkers are currently squeezed out of their shop spaces by ever-rising rentals.

Consumers inevitably are made to pay too, through increases in prices.

Housing Board coffee shops are changing hands at astronomical prices, making it difficult for small-time hawkers, who are not part of any established food and beverage company, to rent stalls or carry on with their trade.

Furthermore, some HDB retail shops are sublet to licensed moneylenders and legal firms.

This is not to the advantage of residents as choice and variety of retailers, and competitive pricing are affected.

It is certainly time for the relevant authorities to rein in the runaway sale and purchase prices in commercial and industrial properties.

The Government should also consider measures to limit the pool of potential buyers in the secondary market so that prices can be reined in further.

Consumers should not have to suffer further increased costs of living through the knock-on effect of ever-rising rentals.

Lillian Lee (Mrs)
ST Forum, 21 Oct 2013

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